Thousands of entrepreneurs have dreams of starting their own companies each year. Only a few manage to succeed and see the dream through. One of the major stumbling blocks for most entrepreneurs when starting businesses is financing or capital. In this text, we explore the different ways one can fund their start-up. But first, here is a breakdown of some finance basics.
Understanding Equity and Debt
Debt is where a line of credit is provided to you, and you’re required to pay back the sum of money within a specific period. In most cases, loans are tied to assets, for example, a car, land, or even a house. Thus defaulting means the lender keeps possession of the asset. Sometimes loans can have no security and are the safer choice.
Equity involves selling a percentage of the business stake to a financier. In many cases, you won’t be required to pay them back. It’s because the investor gets benefits, cash flow, and even voting rights related to their stake.
Ways to Finance Startups
Choosing a financing plan relies on the circumstances that an entrepreneur is in and their preferences. Some prefer loans overselling some part of their business. Here some of the most workable approaches for kick-starting a venture.
Savings
Using personal savings is the safest and easiest way of financing a venture since it involves using personal funds. Savings are a limited source of finance since they rely on one’s ability to save. Some people even go a step further and use their retirement savings in their business.
However, using 401ks’ and retirement savings is risky since you lose your future financial security if the company fails.
Crowdfunding
Crowdfunding is a fun way to raise funds for a project, such as starting a business. You can use a site like Kickstarter.com, where you’ll have strangers, friends, and even family pledge funds through the site. Crowdfunding is recommended for small-sized start-ups. The good thing is there is no expected return of investment expected by the supporters and thus minimizing risk.
Ask Friends or Family
You can also ask your kin and close friends to become investors in your start-up and offer them equity. Alternatively, you can choose to request a loan instead if you don’t want to offer up pieces of your company. Acquiring financing from family is convenient, but it risks ruining relationships. It changes the dynamic of most relationships because there is money on the line.
Credit Card Funding
Credit cards are used for almost anything, from hiring an essay writer to securing funds for a start-up. Using credit cards is easy, and you can also use them to extend a business’s cash flow.
Your credit cards affect your credit rating, and so you can ruin it if you encounter challenges in payment. Low credit means you might struggle to acquire loans in the future.
Angel Investors
Angel investments involve people or organizations that invest in an enterprise by acquiring equity in the venture. They provide funds and sometimes their business expertise since they have navigated the business world and made some money.
Angel investments are challenging to acquire since you need to convince them to believe in your product. Furthermore, angel investors usually set a time frame for a company to begin returning its investments. Otherwise, they will use exit strategies such as liquidation to recover their initial investment.
Find a Partner
When you have a colleague or friend with some capital, you can invite them to partner in your start-up. You can offer the knowledge and them the funding. It will require that you establish each person’s roles and any consequences should one person not hold up their end of the deal. It is safe to have a written contract in such a scenario to protect both parties.
Loans and Microloans
Banks provide loans to small enterprises backed by the SBA (Small Business Administration). SBA-backed loans involve a lot of requirements. If your venture meets the requirements, it can work well to provide the capital you require.
Microloans are loans you can acquire from micro-lenders. Micro-lenders exist because a lot of people fall short of requirements to secure a loan from commercial banks. With micro-lenders, you can obtain loans even when you have no credit history. They also don’t need much documentation, but they will charge more interest than banks.
The Take-Away
Choosing a method to obtain capital can be challenging, but it requires you to weigh all your options carefully. Analyze all risks related to any financing method and decide which ones are worth taking. Finally, as an entrepreneur, make savings a priority, even after you succeed in launching the start-up. You might use the saved funds to expand or start something else in the future.
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